Joe Cahill On Business

America's ever-shrinking middle market

McDonald's troubles raise a scary question: Is it the next Sears?

McDonald's Corp.'s recent slowdown is often blamed on short-term factors like menu innovations and drive-through speeds. If only it were that easy to correct.

Big Mac's real problem stems from deeper causes that can't be fixed with a new milkshake flavor or faster service. McDonald's is battling fundamental, long-term trends that have upended many other mass marketers that flourished by selling to Middle America. It's surprising, in fact, that McDonald's has trundled ahead so long.

Like department stores such as Sears and J.C. Penney, the “Big Three” TV networks and Chevrolet, McDonald's flourished for decades with a lowest-common-denominator proposition for an expanding, economically (and demographically) homogenous middle class. McDonald's hit the sweet spot with food that was convenient, cheap and—if not particularly tasty—consistent in quality.

That formula lifted McDonald's from a Southern California burger stand into the world's biggest fast-food chain with 35,000 restaurants in 118 countries and $28 billion in global sales. When it faced competition, it came largely from imitators like Burger King, which lacked the scale and prime locations to challenge McDonald's dominance.

But the McDonald's model has been operating on borrowed time for years, and recent declines in same-store sales growth reflect troubling new realities for the Oak Brook-based company. First, the U.S. middle class is fracturing as a small group at the top captures outsize income gains and the larger low end loses purchasing power. At the same time, nimbler new competitors are picking off customers.

I see parallels to Sears here. Hoffman Estates-based Sears Holdings Corp. lost its perch atop U.S. retailing to new rivals that met the changing expectations of a new generation of shoppers. Big-box retailers Wal-Mart Stores Inc. and Target Corp. offered more convenience and lower prices for cash- and time-strapped consumers, while specialty stores like Gap Inc. lured younger customers with more-appealing fashions. For the poorest Americans, there now are dollar stores.

Similarly, McDonald's now faces attacks from all sides. Consumers looking for quick, cheap eats can grab a sub sandwich from Subway or Jimmy John's. Those with more time and money to spend can sit down at Panera Bread. Restaurant consultant Darren Tristano of Technomic Inc. in Chicago notes that fast-casual chains like Panera raked in $35 billion last year, more than quadruple their $8 billion in 2000. “There's a lot more choices now, especially for the upper-end consumer,” Mr. Tristano says.

Losing richer customers deepens McDonald's dependence on those who have lost ground since the 1980s. Between 2000 and 2012, real wages declined by 0.2 to 4.5 percent for Americans in the 60th income percentile or lower, according to the Economic Policy Institute, a Washington think tank. The consumer credit bubble of the 2000s artificially inflated the purchasing power of these consumers until 2008, says economist Barry Cynamon of the St. Louis Federal Reserve Bank, who has studied consumption patterns among different income groups.

When the credit bubble burst, so did spending, particularly for folks at the bottom, according to Mr. Cynamon and research partner Steven Fazzari, a professor at Washington University in St. Louis. As McDonald's has acknowledged, its own low-wage employees are among Americans having trouble making ends meet.

Companies that target lower-middle-class consumers are feeling the effects. Even mighty Wal-Mart has blamed stalled sales on the economic pressures afflicting its customers. So has McDonald's.

“In the U.S. we continue to experience a bifurcation of the consumer base,” CEO Don Thompson told Wall Street last fall. “McDonald's core customers skew toward those customers whose disposable income is not rising as much and are spending a little bit less in QSR,” or quick-service restaurants.

McDonald's responses have ranged from a foray into specialty coffees popular with higher-spending customers to an expanded Dollar Menu for penny-pinchers.

But neither addresses McDonald's real problem, which is the problem of the American economy. Stagnant incomes and stubbornly high unemployment are hurting the middle class.

Though McDonald's can't do much to revive the American middle, it does have assets that can help it avoid the fate of shrinking giants like Sears. Most important, in my view, is its strong overseas presence. Burgeoning middle classes in emerging markets such as China offer McDonald's the kind of opportunity it once found at home.

In the U.S., McDonald's long-term outlook won't improve until its core customers get a raise.